The Day Ahead: Fed Chairman Looks to Manage Rational Expectations
The day ahead holds several events that are expected to move the markets. My first focus will be Ben Bernanke's speech titled, "Monetary Policy Objectives and Tools in a Low-inflation Environment."
If another QE program is to be effective, the Fed will need to expend much energy managing the market's rational expectations. This means the FOMC's communication strategy surrounding their inflationary targets is just as important as the method in which they implement any new asset purchase programs.
Yes the prospects for QEII are high, all interest rate movements seem predicated on the prediction for further QE, but the Fed is doing exactly what they said they were planning to do...WAIT AND SEE if QE II is even necessary. Unfortunately this "let's see how things play out" stance has the bond market acting a little antsy (bored, everyone is long), so unless Ben offers up something new for the market to chew on, we may see the pain trade "play out" in the short run.
Essentially what happens here is the market (dealers) looks to prove as many investors wrong as possible, because it can, because there is no substantial "newness" to consider in asset valuations and the bond market is bored. In this case, everybody is long and very vulnerable. I don't think the Fed was bluffing when they hinted over and over again that some new program would soon be launched, so any weakness should be short term.
This is why I wondered if we were getting to complacent with record low mortgage rates last night: Are We Too Complacent with Record Low Mortgage Rates?
Complacency can be a very dangerous thing, especially when we remember that the primary and secondary mortgage markets must be in perfect harmony for mortgage rates to dip below 4.25% (Ironic. Borrwers must be perfect to get those rates).
S&Ps are +1.75 at 1175.75
10s are +0-05 at 101-06 yielding 2.49
FNCL 3.5s are +0-04 at 103-10.
FNCL 4.0s are +0-03 at 103 the dollar.
Key Events in the Day Ahead
8:00 ― Dennis Lockhart, president of the Atlanta Fed, participates in a Q&A session with the Executive Women of Goizueta, in Atlanta.
8:15 ― Ben Bernanke, chairman of the Fed, speaks at the Boston Fed's conference on Revisiting Monetary Policy in a Low Inflation Environment.
8:30 ― Like its producer prices cousin, the Consumer Price Index should provide the framework for the Fed to initiate a more accommodative monetary policy. Headline prices are set to climb 0.2% in September after rising 0.3% in the prior two months. Despite those hefty gains, year-over-year prices are just 1.2% higher. Core prices ― which exclude volatile food and energy prices, and which are a more significant measure as far as regulators are concerned ― are expected to rise 0.1% after a flat reading in August. The year-to-year change was just 0.9%, well below the Fed’s target level.
“We expect headline and core inflation will increase slightly by 0.2% and 0.1% in September, respectively,” said economists at BBVA. “Our forecast implies that 12-month core inflation will remain stable at 0.9% for the past six months. September inflation numbers will be the last consumer prices release and it will be closely watched by the Fed before its two-day meeting in November 2-3.”
Meanwhile, economists at Nomura said the most important aspect of this report will be the rent-related components.
“After firming throughout the summer, rent inflation cooled significantly last month,” they wrote. “If this trend persists, it will imply downside risks to consensus inflation forecasts, in our view. Alternatively, if rent inflation rebounds, we may need to revise up some of our below-consensus calls. From a policy perspective, we think the CPI reading is unlikely to have a major effect on decisions. Even if the core increased by 0.25% m-o-m, the year-on-year rate would hold at 1%.”
8:30 ― Retail Sales are anticipated to continue at a fairly strong clip in September, but at levels below the previous month. Total sales should rise 0.3% after a 0.4% gain in August, while sales excluding auto purchases should be up 0.4% after a 0.5% boost. Weekly sales reports from ICSC ― which have fallen in 7 of the past 10 weeks ― suggest some downsize risks to the report.
“After getting hammered by falling gas prices, plummeting furniture sales, steep clothing retailer markdowns, and a pullback in auto sales, retail sales are recovering nicely from the rough spot in early summer when the economic outlook seemed to be getting darker,” said economists at BTMU.
“In general, the retail sector is making some headway,” they continued, “while still finding it difficult to generate acceleration in consumer spending because it continues to battle a weak labor market and consumer confidence that has the doldrums.”
8:30 ― The Empire State Manufacturing Survey, October’s first look at regional manufacturing sentiment, should continue indicating that output is growing, but only at modest levels. The index is expected to produce an 8.0 score, up from 4.1 in September but weak compared to the 20+ levels seen from February to June.
“Any further deterioration would signal downside risks to the October ISM index,” said economists at Nomura, who predict a 5.0 level.
10:00 ― A preliminary look at the Reuters / U of Michigan Consumer Sentiment report is expected to show that people are feeling only slightly better this month. Economists forecast a 69.0 score, or 0.8 points up from September’s final reading. Until job markets improve substantially, few analysts will be expecting any surge in confidence.
“The main driver of the persistence of low consumer sentiment is expectations, since consumers do not have hope for a robust recovery on the horizon,” said economists at IHS Global Insight.
10:00 ― Business Inventories, a lagging indicator for August, are predicted to rise 0.4% following a 1.0% jump in September. Forecasts are based on an already-reported 0.1% increase in manufacturing inventories, plus inferences that wholesale and retail stocks went up.
ISSUANCE
* 15:00 Treasury distributes Dealer Meeting Agenda
* BicBanco, 5-year offering; BAML/Citi/Itau/JPM
* Pohang, $700m 5-year rumored; BAML/BNP/DB/GS/MS
* CBA, benchmark bond rumored; JPM